Ask Carrie: Is Your Teen Financially Fit?

Dear Parents-of-Teens,

As your child heads back to school, you're probably looking at class choices and schedules, maybe even beginning a college search. But unless you're lucky enough to live in one of the 17 states that require completion of a financial education course prior to high school graduation, there may be one area that's sorely lacking in your teen's education: money management.

That may not seem like the most exciting topic, but here's a stat that should get everyone's attention: Teens spend nearly $260 billion annually!(1) With so little financial education available, that means teens do a lot of spending (and probably borrowing) without understanding the basics of how to manage money or the consequences of mismanaging it.

The good news--kids want to learn

The good news is that, according to a 2011 Schwab Teens & Money Survey, 86 percent of teens would rather learn about money management in class before making mistakes in the real world. Even better news is that, based on results from the Money Matters: Make It Count program offered through Boys & Girls Clubs of America (BCGA), kids show dramatic improvement in their understanding of personal finance concepts after participating in the program. And most important of all, a study of more than 1,600 teens who completed the program showed that 17 percent switched from being spenders to being savers, and 23 percent were sticking to a budget.

This corroborates my own personal experience working with Money Matters and BGCA. Now in its 13th year, with nearly three-quarters of a million teens having completed the program, Money Matters has shown some remarkable results. Part of those results are derived from BGCA's efforts to make the program relevant to teens through a wide range of experiential activities and content. I'm particularly excited about two new elements of the program--Reality Store, a real-world interactive workshop, and a digital game called $ky--where kids discover first-hand how education, career, family and spending can impact their financial futures. There's nothing like experiential activities to give kids a taste of financial reality.

But regardless of whether a class or program is available, I believe it's up to parents to fill in the gaps in a young person's financial education. Here are some ideas on how to introduce your own kids to today's financial realities.

Five practical ways to get started

As parents, we can always do a better job of communicating conceptual information, but real learning comes from doing. So instead of just talking about money, try teaching your kids through hands-on money experiences and responsibilities.
  • Use daily opportunities as "teachable moments." For instance, when you're paying bills, let your teen see what it costs to run a household, and how bills get paid and a checkbook balanced. If you pay your bills online, show them how it's done--and how online bill-pay is linked to your checking account.
  • Pay an allowance only once a month. To learn how to budget and make their money last, teens have to have their own money, whether it's through an allowance or earnings from a part-time job. Help them understand the difference between needs and wants and how to budget for both. Make them responsible for a certain share of their own expenses (for example, clothing, a new electronic gadget, or extra-curricular activities). Most of all, let them learn from their mistakes. Don't immediately come to the rescue if they come up short.
  • Open a checking account. Show your teen how to use a check register and review monthly statements online or on paper. Guide them in using a debit card wisely and keeping track of debit expenditures. Show them how to use an ATM machine for deposits and withdrawals.
  • Help make savings a habit. Help your teen open a savings account. Talk about goals and setting savings priorities. Suggest saving a percentage of any earnings or gifts toward a goal. If your teen has a job, have them set up a direct deposit to their checking account that links to their savings account. Consider matching a portion of their savings to further motivate them to put money away.
  • Show them your 401(k) or IRA statement. Explain what a 401(k) plan is and how it works. Kids aren't thinking about retirement yet, but they should be once they get their first job. Introduce the idea of saving and investing 10 percent of their salary toward retirement by opening up a Roth IRA from the get-go. A savings calculator is a great way to demonstrate how painless it is to start accumulating a really nice nest egg if you start early.

Other topics teens want to know about

With a solid foundation in the basics, you can add more sophisticated topics. The Teens & Money Survey found that kids are particularly interested in things such as the kinds of insurance they'll need when they're on their own, how to invest to make money grow, how income taxes work, and how to establish good credit. It's definitely encouraging to see that the interest is there. Now it's up to us to help turn that interest into practical experience.

Be a good role model

Our kids are watching us and looking to us for guidance. The more we can share with them about our own money management practices--from household budgeting to saving to investing--the better for everyone. So be open and talk freely about how you handle your money and teach them by your good example. And if you feel you need a bit of sharpening up yourself with any particular areas of personal finance, visit SchwabMoneywise.com, which offers tools and resources for anyone who wants a refresher in the basics of personal finance, as well as those who are just starting out.

But don't let the schools off the hook. If a financial literacy class isn't on the schedule at your teen's school, you might petition your school district to have one added to the curriculum. To me, money management is a critical life skill for everyone. And the sooner it's learned, the better.

For more updates, follow Carrie on LinkedIn and Twitter.

Looking for answers to your retirement questions? Check out Carrie's book, "The Charles Schwab Guide to Finances After Fifty: Answers to Your Most Important Money Questions."

This article originally appeared on Schwab.com. You can e-mail Carrie at askcarrie@schwab.com, or click here for additional Ask Carrie columns. This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice. Asset allocation and diversification cannot ensure a profit or eliminate the risk of investment losses. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager. Diversification cannot ensure a profit or eliminate the risk of investment losses.

The information on this website is for educational purposes only. It is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager.

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